Last quarter, Australian consumer prices rose at their quickest annual rate in two decades, owing to increases in the cost of gasoline, home construction, and food, fuelling speculation that interest rates could be raised from record lows as soon as next week.
That would be unpleasant news for Prime Minister Scott Morrison, who is fighting a tight election in which voters are concerned about growing living costs.
The figures confirmed a growing notion that the Reserve Bank of Australia (RBA) no longer needs to keep interest rates at emergency lows of 0.1 percent and should tighten sooner rather than later.
“The increase in non-tradables inflation implies that this is largely attributable to wage momentum, rather than just global economic shocks,” according to ANZ Bank economists in a research.
“The RBA is now expected to raise rates by 15 basis points next week. Inflationary forces have gained traction and spread. Against this environment, a cash rate objective of 0.1 percent is insufficient “” ckdrop”
Markets also shaved 0.25 percent off the odds of a raise next week, while many still prefer a June hike because to the risk of political repercussions so close to the election on May 21.
By June, futures were pricing in rates of 0.5 percent, whether in one or two hikes.
Investors had already factored in rate hikes and were more concerned about Chinese lockdowns and plummeting stock markets, so the Australian dollar rose off two-month lows to as high as $0.7190, although it was still down on the week.
“We now expect the RBA to rise by 40 basis points to 0.5 percent in June,” said Andrew Boak, an economist at GS Macro, who predicts a series of quarter-point increases to a 2.5 percent peak.
“A combination of above-target inflation, an economy that was originally resistant to rate hikes, and a more hawkish reaction function skews risks toward a steeper and higher rate path.”
The consumer price index (CPI) increased 2.1 percent in the first quarter, above market expectations of a 1.7 percent gain, according to Wednesday’s report.
The annual rate increased to 5.1 percent in the third quarter, up from 3.5 percent the previous quarter and the most since 2001.
The trimmed mean, a closely monitored measure of core inflation, set a new high of 1.4 percent in the third quarter, bringing the annual rate to 3.7 percent, the most since early 2009.
Core inflation had risen above the Reserve Bank of Australia’s (RBA) 2-3 percent target band for the first time since 2010, a dramatic change from recent years when it had routinely undershot.
“As the effects of supply interruptions, higher shipping costs, and other global and domestic inflationary drivers trickled through the economy, this highlighted the broad-based nature of price rises,” said Michelle Marquardt, the Australian Bureau of Data’ head of pricing statistics.
Petrol topped the price rises with a 35 percent year-on-year increase, while the cost of new homes increased by a record 13.7 percent. High transportation, fertiliser, packaging, and ingredient costs all pushed up food prices in the first quarter.
Because of the direction in the RBA’s April policy meeting minutes, analysts at the Commonwealth Bank of Australia said the inflation statistics showed the RBA should start hiking rates, but they were not modifying their minds that the first move would be in June – after the next round of wages data.
“If the RBA raises the cash rate at its May board meeting next week, they will have gone back on what they said only last week – namely, that the board agreed that evidence on both inflation and the evolution of wages costs will be taken into account as it determines policy,” they wrote in a report.